Partial transcript of Sen. Chris Murphy’s (D-Connecticut) Q&A with James W. Runcie, Chief Operating Officer of the Department of Education’s Federal Student Aid, on strengthening the federal student loan program for borrowers. The Senate Health, Education, Labor & Pensions Committee hearing was held on March 27, 2014:

Sen. Chris Murphy (D-Connecticut):
…I’ll just ask one question around the subject of when an individual goes to buy a house, the bank is going to assess both their credit-worthiness and also the soundness of the investment that they’re making. They’re going to do an inspection of the house. They’re going to make sure that it’s a place worth investing in.

The programs you run – the assessments on the borrowers is different. It’s not about creditworthiness. It’s about need. But the institution in this case, the equivalent of the “house”, deserves to have the same kind of rigorous analysis applied to it. And today, we sort of have an all or nothing approach when we’re looking at these institutions as to whether they are worthwhile investments for the federal tax dollar.

And I look at an institution like a place called Corinthian College in California – a school that has revenue above $1.7 billion – 83% of it comes from the programs that you run. And yet, they have default rates in the neighborhood of 36%, a three-year default rate at 40%, prices that are wildly out of step with other competitors in the area. And when they ran afoul of the default rate rules, the way they got back into compliance was to call their borrowers on average of 110 times a month to convince them to just seek more deferments and forbearance. They actually didn’t do much about the price of the degree or about the quality. They just convinced students to push their obligations out further.

There are other models out there other than the all or nothing approach, which would involve much more of a risk-sharing model, in which that schools that aren’t performing or have a higher-than-average default rates or low graduation rates would share more of the burdens of the outstanding loans rather than just saying that if you don’t meet a certain threshold you aren’t eligible for federal aid. I think we’ve only sanctioned eight schools.

So do you think the current method by which we judge institutions’ capability to give students a quality degree and allow them to make enough money to repay loans is working? And what do you think about some of these other models?

James W. Runcie, Chief Operating Officer, Federal Student Aid, Department of Education:
I think some of those other models are promising. They’re being discussed, and we’d be ready to…compliance activities and put that into in terms of operations. Right now, we look at cohort default rates, as you know, and to some extent depending on the utilization of forbearance, deferment that can be manipulated somewhat. But forbearance, deferment – those are sort of entitlements under the program. However, the servicers are ultimately the ones that can put people in deferment or forbearance so the school may guide them there but the servicer also has to have a conversation, work with them, to see if that’s the best option for them at that time versus income-based repayment or something like that.

The other thing is, you know, we’re going through the negotiated rule-making process for gainful employment and that would also have an impact in terms of addressing some of the issues that you mentioned potentially with the proprietary schools.

But you know, in terms of a wholesale change in model and weighted to address those issues, I’m open – we’re open to operationalizing those.

Sen. Chris Murphy (D-Connecticut):
I’m glad to hear that. The idea that we’re sending, in this particular institution’s case, $1.4 billion in taxpayer money all for the benefit of getting a 40% default rate and graduation rates, I think, that are hovering under 10% at this institution is mind-blowing. And Sen. Murray, Sen. Sanders, and myself have legislation and I hope we’ll take a look at it in the context of HEA reauthorization. It’ll give you and give the Department of Education some new tools with which to try to hold these schools accountable when we’re making decisions on how to allocate $140 billion a year.